Forward-looking Statements Statements included in this report and in future filings by
TrustCo Bank Corp NY("TrustCo" or the "Company") with the Securities and Exchange Commission, in TrustCo's press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. Examples of forward-looking statements include, among others, statements TrustCo makes regarding its expectations for complying with the new regulatory capital rules, the profitability of growth of the Company's balance sheet and the ability of its loan products to continue to attract customers if long-term rates rise. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo's Annual Report on Form 10-K for the year ended December 31, 2013, the following important factors, among others, in some cases have affected and in the future could affect TrustCo's actual results, and could cause TrustCo's actual financial performance to differ materially from that expressed in any forward-looking statement:
· TrustCo's ability to continue to originate a significant volume of one- to
four-family mortgage loans in its market areas;
· TrustCo's ability to continue to maintain noninterest expense and other
overhead costs at reasonable levels relative to income;
· the future earnings and capital levels of
non-objection by TrustCo's and
regulators, to the extent required, to distribute capital from
the Company, which could affect the ability of the Company to pay dividends;
· TrustCo's ability to make accurate assumptions and judgments regarding the
credit risks associated with its lending and investing activities, including
changes in the level and direction of loan delinquencies and charge-offs,
changes in property values, and changes in estimates of the adequacy of the
allowance for loan losses;
· the effects of and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the
Reserve System, inflation, interest rates, market and monetary fluctuations;
· the perceived overall value of TrustCo's products and services by users,
including the features, pricing and quality compared to competitors' products
and services and the willingness of current and prospective customers to substitute competitors' products and services for TrustCo's products and services;
· the effect of changes in financial services laws and regulations (including
laws concerning taxation, banking and securities) and the impact of other
governmental initiatives affecting the financial services industry; 40
· results of examinations of
primary federal banking regulators, including the possibility that the
regulators may, among other things, require us to increase our loss allowances
or to take other actions that reduce capital or income;
· real estate and collateral values;
· changes in accounting policies and practices, as may be adopted by the bank
Company Accounting Oversight Board;
· technological changes;
· changes in local market areas and general business and economic trends, as well
as changes in consumer spending and saving habits;
· TrustCo's success at managing the risks involved in the foregoing and managing
its business; and
· other risks and uncertainties included under "Risk Factors" in our Form 10-K
for the year ended
The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Following this discussion is the table "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three and six month periods ended
June 30, 2014and 2013.
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three and six month periods ended
June 30, 2014, with comparisons to the corresponding period in 2013, as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2013 Annual Report to Shareholders on Form 10-K, which was filed with the SECon March 7, 2014, should also be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation. Financial markets exhibited relatively moderate volatility during the second quarter of 2014, similar to the first quarter of 2014. For the second quarter, the S&P 500 Index was up 4.7% and the Dow Jones Industrial Average was up 2.2%, with both indices moving generally up during the period after some softness early in the quarter. Credit markets also showed lessened volatility during the quarter. On average, key market rates in the second quarter of 2014 were similar to the first quarter of 2014, however the shape of the curve did change somewhat. For example, the 10 year Treasury bond averaged 2.62% during Q2 compared to 2.77% in Q1. However, 2 and 5 year rates rose 5 and 6 basis points, respectively. As a result, the spread between the 10 year and the 2 year bonds declined from 2.39% on average in Q1 to 2.20% in Q2. The spread remains much better than it was through much of 2013; for example the average spread in the second quarter of 2013 was 1.71%, 49 basis points below the current quarter. Steeper yield curves are favorable for portfolio mortgage lenders like TrustCo. The table below illustrates the range of rate movements for both short term and longer term rates. The target Fed Funds range remained unchanged at zero to 0.25% during the second quarter of 2014. Spreads of certain asset classes, including agency securities and mortgage-backed securities, remained relatively narrow compared to the Treasury curve during the second quarter of 2014, and in fact contracted relative to Q1. Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the direction that the Federal Reserve Boardwould take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors.
Index 3 Month 2 Year 5 Year 10 Year 10 - 2 Year Yield (%) Yield (%) Yield (%) Yield (%) Spread(%) Beg of Q2 0.08 0.23 0.76 1.86 1.63 Peak 0.08 0.43 1.49 2.60 2.17 Q2/13 Trough 0.03 0.20 0.65 1.66 1.46 End of Q2 0.04 0.36 1.41 2.52 2.16 Average in Q2 0.05 0.27 0.91 1.99 1.71 Beg of Q3 0.04 0.34 1.39 2.50 2.16 Peak 0.06 0.52 1.85 2.98 2.52 Q3/13 Trough 0.00 0.30 1.31 2.48 2.14 End of Q3 0.02 0.33 1.39 2.64 2.31 Average in Q3 0.03 0.37 1.50 2.71 2.34 Beg of Q4 0.02 0.33 1.42 2.66 2.33 Peak 0.14 0.42 1.75 3.04 2.66 Q4/13 Trough 0.02 0.28 1.29 2.51 2.20 End of Q4 0.07 0.38 1.75 3.04 2.66 Average in Q4 0.06 0.33 1.44 2.74 2.42 Beg of Q1 0.07 0.39 1.72 3.00 2.61 Peak 0.08 0.47 1.77 3.01 2.61 Q1/14 Trough 0.02 0.30 1.44 2.60 2.24 End of Q1 0.05 0.44 1.73 2.73 2.29 Average in Q1 0.05 0.37 1.60 2.77 2.39 Beg of Q2 0.04 0.44 1.74 2.77 2.33 Peak 0.04 0.51 1.80 2.82 2.35 Q2/14 Trough 0.01 0.35 1.50 2.44 2.06 End of Q2 0.04 0.47 1.62 2.53 2.06 Average in Q2 0.03 0.42 1.66 2.62 2.20 Underlying national economic conditions remain subdued, with persistent issues in regard to unemployment and underemployment and continued high levels of financial leverage in some sectors. There have been some encouraging economic reports; however the level of persistent strength needed to significantly change the overall condition of the economy has not materialized. There have been some improvements in recent quarters, including a declining unemployment rate and gains in home values in some areas. However declining rates of labor participation, government budget deficits and debt levels in
the United Statesremain a concern, and sovereign fiscal issues in a number of European nations, as well as slowing economies elsewhere, continue to contribute to global economic issues.
The pace of bank failures has continued to decline and is no longer a significant issue. The 2008 through early 2010 period saw unprecedented intervention by governments in markets and the financial services industry as
the United Statessaw the two largest bank failures in its history in 2008, as well as failures of other major financial institutions, forced mergers and massive government bailouts. The United States governmentresponded to these events with legislation, including the Emergency Economic Stabilization Act of 2008, which authorized the Troubled Asset Relief Program ("TARP"), and the American Recovery and Reinvestment Act of 2010 ("ARRA"), more commonly known as the economic stimulus or economic recovery package, which was intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, the Federal Reserve Board("FRB") implemented a variety of major initiatives, including a sharp easing of monetary policy and direct intervention in a number of financial markets, and the Federal Deposit Insurance Corporation("FDIC"), the Treasury Departmentand other bank regulatory agencies also instituted a wide variety of programs. As noted, uncertainty regarding the eventual need for the FRB to move away from its quantitative easing ("QE") programs and other easy money policies and the need for the FRB and other elements of the government to withdraw various supporting mechanisms remain concerns for both the economy and financial markets. It is not clear how aggressive the government will be in unwinding some of the programs that are now in place, or if any of those programs will be unwound at all. The federal government, primarily through the Treasury Departmentand the federal banking agencies, is also implementing the financial reform bill, the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act."), which has had and will likely continue to have a significant impact on the financial services industry. In July 2013, the FDICand the FRB approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The final rule implements the " BaselIII" regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for the Company and the Bank on January 1, 2015, and refines the definition of what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to average consolidated assets ratio (known as the "leverage ratio") of 4%. The final rule also establishes a "capital conservation buffer" of 2.5% above the new regulatory minimum capital ratios and when fully phased in, effectively, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. We will be subject to limitations, as stipulated in the new rules, on paying dividends, engaging in share repurchases and paying discretionary bonuses if our capital level falls below the buffer amount.
The application of more stringent capital requirements for the Company and the Bank could, among other things, result in lower returns on equity, require the raising of additional capital and result in regulatory actions, such as the inability to pay dividends or repurchase shares, if we were to be unable to comply with such requirements. Management is currently evaluating the provisions of the final rules and their expected impact on the Company. Based on the Company's current balance sheet composition and capital levels, management believes that the Company will be in compliance with the new requirements. The Dodd-Frank Act also included provisions that created a new agency, the
Consumer Financial Protection Bureau(the "CFPB"), to centralize responsibility for consumer financial protection and be responsible for implementing, examining and enforcing compliance with federal consumer financial laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others. Depository institutions that have assets of $10 billionor less, such as the Bank, will continue to be supervised by their primary federal regulators (in the case of the Bank, the OCC). The CFPBwill also have data collecting powers for fair lending purposes for both small business and mortgage loans, as well as authority to prevent unfair, deceptive and abusive acts and practices. These new and revised rules have and may continue to increase our regulatory compliance burden and costs and restrict the financial products and services we offer to our customers. In January 2013, the CFPBissued a series of final rules related to mortgage loan origination and mortgage loan servicing. In particular, on January 10, 2013, the CFPBissued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the "QM Rule"). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of "qualified mortgage" are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a "qualified mortgage" incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective on January 10, 2014.
TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company's strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company has experienced an increase in nonperforming loans ("NPLs") relative to historical levels, although NPLs have declined over recent quarters, and management believes the current level remains manageable. While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolios at
June 30, 2014, should general housing prices and other economic measures, such as unemployment in the Company's market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans. In addition, the natural flight to quality that occurs in financial crises as investors focus on the safest possible investments, cuts in targeted interest rates and liquidity injections by the Federal government have all served to reduce yields available on both short term liquidity (Fed Funds and other short term investments), as well as the low risk types of securities typically invested in by the Company. Also, as noted, the level of rates was relatively stable during the quarter but the shape of the curve did shift somewhat. The average slope of the curve (measured by the 10 year Treasury versus the 2 year Treasury) declined 19 basis points to 2.20% in the second quarter of 2014 compared to the first quarter of 2014. As noted, a steeper slope in the yield curve is generally better for mortgage lender profitability. The future course of interest rates is subject to significant uncertainty, as various indicators are providing contradicting signals. For example, the FRB has been reducing assets purchases under its quantitative easing program over recent months and is currently expecting to end purchases after October. The end of that program, combined with gains in the level of economic activity could potentially lead to higher rates. Potentially offsetting these issues is that Treasuries continue to be viewed as a safe haven by many investors around the world, with their demand serving to dampen or completely outweigh any upward pressure on yields. Finally, the Dodd-Frank Act creates additional uncertainty for the Company and the Bank. This law significantly changed the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. Home foreclosures have declined nationally over the last year but remain an area of political, regulatory and media interest. Problems such as instances of foreclosures where the paperwork or process may not have met legal requirements have created significant legal and public relations problems for banks and other mortgage lenders. Since the financial crisis began in 2008, numerous government and private actions have been undertaken relative to home lending, resulting in billions of dollars of fines against major industry participants for issues involving various aspects of their mortgage businesses, including foreclosure process issues. TrustCo's mortgage loan portfolio consists of loans it and its employees have originated and serviced. Files with the relevant documents are retained and monitored by staff members on Bank premises. As a result, management believes the Company is unlikely to be significantly affected by errors in foreclosing on its mortgage loans. In addition, because TrustCo generally originates loans to be held in its portfolio, the exposure that can come with being forced to buy back nonperforming loans that have been sold is extremely limited.
TrustCo recorded net income of
$11.8 million, or $0.125of diluted earnings per share for the three months ended June 30, 2014, as compared to net income of $9.8 millionor $0.104of diluted earnings per share in the same period in 2013. For the six months ended June 30, 2014, net income was $22.8 millionversus $18.9 millionfor the year earlier period, while earnings per share were $0.241compared to $0.201, for the same periods. The primary factors accounting for the change in net income for three and six month periods ended June 30, 2014as compared to the same periods of the prior year were:
· An increase in the average balance of interest earning assets of
2013, and an increase of
$183.0 millionfor the first six months of 2014 compared to the prior year period.
· An increase in the average balance of interest bearing liabilities of
period in 2013, and an increase of
2014 compared to the prior year period.
· An increase in taxable equivalent net interest margin for the second quarter of
2014 to 3.16% from 3.10% in the prior year period. The increase in the margin
coupled with the increase in average earning assets, resulted in an increase
of 2014 compared to the second quarter of 2013. For the six month period,
taxable net interest income was up
in average earning assets as the net interest margin remained flat at 3.15%
versus the year earlier period.
· A decrease in the provision for loan losses to
quarter of 2014 from
in the provision to
· A decrease of
for the second quarter of 2014 compared to the prior year. Excluding
securities gains, noninterest income was up nominally for the quarter. For the
six month periods, noninterest income was down
period in 2014 included a
planned regional administrative building in
2013 included securities gains of
· A decrease of
(ORE) expense, for the second quarter of 2014 as compared to the second quarter
of 2013. Excluding ORE costs, noninterest expense was up
Second quarter 2014 results included a gain of
owned real estate, which is included in the "Other real estate (income)
expense, net" line on the Consolidated Statement of Income. For the six months
million. The primary reason for the decline was a
ORE line, again due primarily to the gain of
$2.4 millionrecorded in the second quarter of 2014. 46
· An increase of
profits for the second quarter of 2014 compared to the prior year. For the six
earlier period, resulting from higher pre-tax profits and a
write-down of the deferred tax asset in first quarter of 2014 from changes in
New York Statetax law. Asset/Liability Management The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis. TrustCo's results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates, and more generally in the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo's results. Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2013is a description of the effect interest rates had on the results for the year 2013 compared to 2012. Many of the same market factors discussed in the 2013 Annual Report continued to have a significant impact on the second quarter results for 2014. TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans. In the experience of management, the absolute level of interest rates, changes in interest rates and customers' expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period. Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to implement national economic policy is the "Federal Funds" rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. The target range has not been changed since. FRB officials have not been completely consistent or clear in regard to expectations for the future but have generally stressed the need to be accommodative given economic conditions. Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate. The average rate on deposits was lower in the second quarter of 2014 relative to the prior year period. Please refer to the statistical disclosures in the table below entitled "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential."
The interest rate on the 10 year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields. Currently (based on the FRB's statement released
June 18, 2014) this includes the purchase of agency mortgage-backed securities and longer-term Treasury securities at a pace of $35 billionper month, compared to $85 billionper month at the peak, as well as the reinvestment of principal payments from FRB holdings. Purchase levels have been scaled down by the FRB in recent months. The FRB has also indicated that it expects to cease its buying program later this year. Eventually, management believes, the FRB will have to unwind these positions by selling mortgage-backed securities, which would likely have the opposite effect, putting upward pressure on rates, although other factors may mitigate this pressure. Alternatively, the FRB could gradually stop reinvesting principal payments once it concludes its buying program. This approach would likely be less disruptive to markets in an immediate sense, but would take a relatively long time to complete. These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings. The principal loan products for TrustCo are residential real estate loans. As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10 year Treasury. As noted previously, the 10 year Treasury yield was down somewhat, on average, during the second quarter of 2014 as compared to the first quarter of 2014, although the yield remains at relatively modest levels as compared to historical yields. Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. Because TrustCo is a portfolio lender and does not generally sell loans into the secondary market, the Company establishes rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the Federal government have had an impact on rate levels for certain products. Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above. The futures of Freddie Mac and Fannie Mae remain uncertain as Congressdebates the structure of both entities. The Federal Funds sold and other short term investments portfolios are affected primarily by changes in the Federal Funds target rate. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which is recorded at fair value. Generally, as interest rates increase the fair value of these securities will decrease. Interest rates generally remained below historic norms on both short term and longer term investments during the second quarter of 2014. As noted, deposit costs were lower in the second quarter of 2014 compared to the prior year, and also declined relative to the first quarter of 2014.
While TrustCo has been affected by aspects of the overall changes in financial markets, it was not affected to the degree the mortgage crisis affected some banks and financial institutions in
the United States. Generally, the crisis revolved around actual and future levels of delinquencies and defaults on mortgage loans, in many cases arising, in management's view, from lenders with overly liberal underwriting standards, changes in the types of mortgage loans offered, significant upward resets on adjustable rate loans and fraud, among other factors. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in portfolio there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo's loan portfolio and non-performing loans, please refer to the discussions under "Loans" and "Nonperforming Assets," respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a very significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.
A fundamental component of TrustCo's strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its existing infrastructure. The Company expects that growth to be profitable.
current interest rate environment has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial in the short term. In line with this view, balance sheet expansion did slow in the second quarter as compared to recent quarters.
For the second quarter of 2014, the net interest margin was 3.16%, up 6 basis points versus the prior year's quarter. The quarterly results reflect the following significant factors:
• The average balance of federal funds sold and other short-term investments
in the second quarter of 2014 as compared to the same period in 2013. The
increase in the average balance reflects the decision to temporarily limit
purchases of additional securities given the relative attractiveness of loans
• The average balance of securities available for sale decreased by
million while the average yield increased to 2.10% for the second quarter of
2014 compared to 1.83% for the same period in 2013. The average balance of
held-to-maturity securities decreased by
increased to 3.64% for the second quarter of 2014 compared to 3.46% for the
same period in 2013.
• The average loan portfolio grew by
average yield decreased 11 basis points to 4.53% in the second quarter of 2014
compared to the same period in 2013. The decline in the average yield
primarily reflects the decline in market interest rates on new loan
originations as older, higher rate loans pay down. The yield did increase by 1
basis point relative to the first quarter of 2014. 49
• The average balance of interest bearing liabilities (primarily deposit
points to 0.38% in the second quarter of 2014 compared to the same period in
2013. The decline in the rates paid on interest bearing liabilities reflects
the Bank's decision to lower rates offered in response to market interest rates
and changes in competitive conditions.
During the second quarter of 2014, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates as the rate environment changed. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. As noted, the widespread disruptions in the mortgage market as a result of the financial crisis have not had a significant impact on TrustCo, partly because the Company has not originated the types of loans that have been responsible for many of the problems causing the disruptions as well as the fact that housing prices in the Company's primary market of the
Capital Regionof New Yorkhave not experienced the declines realized in other areas of the country. The withdrawal from the market of some of the troubled lenders that did focus on subprime and similar loans slightly improved competitive conditions for the type of residential mortgage loans focused on by TrustCo; however, competition remains strong. The strategy on the funding side of the balance sheet continues to be to attract deposit customers to the Company based upon a combination of service, convenience and interest rate. The Company has periodically offered attractive long-term deposit rates as part of a strategy to lengthen deposit lives. However, the decline in deposit costs, which initially lagged the decline in the Federal Funds target rate, has continued since the Federal Funds target was stabilized in late 2008. Earning Assets Total average interest earning assets increased from $4.34 billionin the second quarter of 2013 to $4.49 billionin the same period of 2014 with an average yield of 3.45% in 2013 and 3.49% in 2014. Interest income on average earning assets increased from $37.4 millionin the second quarter of 2013 to $39.2 millionin the second quarter of 2014, on a tax equivalent basis, benefiting from both the increase in average earning assets and the improved yield earned.
The average balance of loans was
$2.97 billionin the second quarter of 2014 and $2.73 billionin the comparable period in 2013. The yield on loans decreased 11 basis points to 4.53%. The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $31.6 millionin the second quarter of 2013 to $33.6 millionin the second quarter of 2014. Compared to the second quarter of 2013, the average balance of the loan portfolio during the second quarter of 2014 increased in all categories, including residential mortgage, commercial loan, home equity and installment loan categories. The average balance of residential mortgage loans was $2.40 billionin 2014 compared to $2.18 billionin 2013, an increase of 10.3%. The average yield on residential mortgage loans decreased by 16 basis points to 4.59% in the second quarter of 2014 compared to 2013.
TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on treasury securities, the federal funds rate and rates set by competitors and secondary market participants. As noted earlier, market interest rates have changed significantly in recent years as a result of national economic policy in
the United States, as well as due to disruptions in the mortgage market. During this period of changing interest rates, TrustCo aggressively marketed the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area. Commercial loans, which consist primarily of loans secured by commercial real estate, increased $7.7 millionto an average balance of $221.8 millionin the second quarter of 2014 compared to the same period in the prior year. The average yield on this portfolio decreased 13 basis points to 5.12% over the same period. The average yield on home equity credit lines increased 25 basis points to 3.62% during the second quarter of 2014 compared to 3.37% in the prior period. This was the result of both a higher introductory rate offered on new lines as well as older lines repricing to the product's floor rate. The average balances of home equity lines increased 1.9 % to $339.9 millionin the second quarter of 2014 as compared to the prior year. Securities Available-for-Sale The average balance of the securities available-for-sale portfolio for the second quarter of 2014 was $825.0 millioncompared to $958.6 millionfor the comparable period in 2013. The decreased balances reflect routine paydowns, calls, maturities and limited new investment purchases. During the quarter, continued low market yields on securities eligible to be added to the portfolio resulted in loans being a more attractive option for the deployment of cash. The average yield was 2.10% for the second quarter of 2014 and 1.83% for the second quarter of 2013 for the available-for-sale portfolio. The improvement in yield primarily reflects the change in the portfolio mix and the impact of slowing prepayment rates on mortgage-backed securities. This portfolio is primarily comprised of agency issued residential mortgage-backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency issued commercial mortgage-backed securities, Small Business Administrationparticipation certificates, municipal bonds and corporate bonds. These securities are recorded at fair value with any adjustment included in other comprehensive income (loss), net of tax. The net unrealized loss in the available-for-sale securities portfolio was $11.2 millionas of June 30, 2014compared to a net unrealized loss of $30.1 millionas of December 31, 2013. The unrealized gain or loss in the portfolio is primarily the result of changes in market interest rate levels.
Held-to-Maturity SecuritiesThe average balance of held-to-maturity securities was $80.3 millionfor the second quarter of 2014 compared to $107.6 millionin the second quarter of 2013. The decrease in balances reflects routine paydowns, calls and maturities and follows the overall decline in securities with a shift towards cash for more flexibility and loans for greater yield. The average yield was 3.64% for the second quarter of 2014 compared to 3.46% for the year earlier period. The improvement in yield primarily reflects the change in the portfolio mix and the impact of slowing prepayment rates on mortgage-backed securities. TrustCo expects to hold the securities in this portfolio until they mature or are called.
Federal Funds Sold and Other Short-term Investments The 2014 second quarter average balance of federal funds sold and other short-term investments was
$606.8 million, a $77.1 millionincrease from the $529.7 millionaverage for the same period in 2013. The yield was unchanged at 0.25%. Interest income from this portfolio increased $49 thousandfrom $327 thousandin 2013 to $376 thousandin 2014, reflecting the average balance increase. The federal funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios. Funding Opportunities TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company's funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts. Total average interest-bearing deposits (which includes interest-bearing checking, money market accounts, savings and certificates of deposit) increased $100.5 millionto $3.67 billionfor the second quarter of 2014 versus the prior year, and the average rate paid decreased from 0.38% for 2013 to 0.36% for 2014. Total interest expense on these deposits decreased $90 thousandto $3.3 millionin the second quarter of 2014 compared to the year earlier period. The increase in deposits versus the prior year was due to strong growth in core deposits as well as renewed growth in certificates of deposit. From the second quarter of 2013 to the second quarter of 2014, interest bearing demand account average balances were up 8.7%, money market account average balances were up 0.6% and savings account average balances were up 1.8%, while non-interest demand average balances were up 5.2%. Average balances in certificates of deposits increased 2.2% over the same time frame, and constitute 28.7% of total average deposits. The Company does not accept brokered deposits and does not pay premium rates on certificates with balances over $100,000.
(dollars in thousands) Under 1 year
$ 621,7351 to 2 years 480,161 2 to 3 years 24,832 3 to 4 years 5,570 4 to 5 years 10,305 Over 5 years 120 $ 1,142,723Average short-term borrowings for the quarter were $189.8 millionin 2014 compared to $179.9 millionin 2013. The average rate decreased during this time period from 0.82% in 2013 to 0.72% in 2014. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral. Net Interest Income Taxable equivalent net interest income increased by $1.9 millionto $35.5 millionin the second quarter of 2014 as compared to the same period in 2013. The net interest spread was up 7 basis points to 3.11% in the second quarter of 2014 as compared to the year ago period. As previously noted, the net interest margin was up 6 basis points to 3.16% for the second quarter of 2014 as compared to the same period in 2013. For the first six months of 2014 taxable equivalent net interest income increased by $2.9 millionto $70.2 millionas compared to the same period in 2013. Nonperforming Assets Nonperforming assets include nonperforming loans (NPLs), which are those loans in a nonaccrual status and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are categorized as other real estate owned.
Impaired loans are considered to be those commercial and commercial real estate loans in a nonaccrual status and troubled debt restructurings (TDRs). The following describes the nonperforming assets of TrustCo as of
Nonperforming loans and foreclosed real estate: Total NPLs were
$40.9 millionat June 30, 2014, compared to $43.4 millionat both December 31, 2013and June 30, 2013. There were $40.7 millionof nonaccrual loans at June 30, 2014compared to $43.2 millionat December 31, 2013and $43.3 millionat June 30, 2013. There were no loans at June 30, 2014and 2013 and December 31, 2013that were past due 90 days or more and still accruing interest. At June 30, 2014, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $40.9 million, $35.2 millionwere residential real estate loans, $5.6 millionwere commercial mortgages and commercial loans and $88 thousandwere installment loans, compared to $36.3 million, $7.0 millionand $93 thousand, respectively at December 31, 2013.
As previously noted, a significant percentage of non-performing loans are residential real estate loans, which are historically lower-risk than most other types of loans. The Bank's loan loss experience on these loans has generally been favorable with net charge-offs of 0.23% of average residential real estate loans (including home equity lines of credit) for the second quarter of 2014 (annualized), compared to 0.32% for the second quarter of 2013. These levels still remain somewhat elevated compared to historical levels, reflecting current economic conditions. Management believes that these loans have been appropriately written down where required. Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the
Capital Regionof New Yorkand avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated automatically generated notices as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. The collateral on nonaccrual loans is evaluated periodically and the loan value is written down if the collateral value is insufficient. The Company originates loans throughout its deposit franchise area. At June 30, 2014, 83.8% of its gross loan portfolio balances were in New York Stateand the immediately surrounding areas (including New Jersey, Vermontand Massachusetts), and 16.2% were in Florida. Those figures compare to 84.9% and 15.1%, respectively at December 31, 2013. Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New Yorkthan in Florida, at 8.0% and 4.5%, respectively, as of June 30, 2014. The Floridaand New Yorklevels of commercial loans as a percent of total loans within each geographic region were similar to the December 31, 2013numbers of 8.2% in New Yorkand 4.9% in Florida. Economic conditions vary widely by geographic location. Floridaexperienced a more significant downturn than New Yorkduring the recession. Reflecting that, nonperforming loans (NPLs) had generally been more heavily weighted towards Floridain recent years. However, as of June 30, 2014, NPLs were roughly in line with regional outstandings, as 10.0% of nonperforming loans were to Floridaborrowers, compared to 90.0% in New Yorkand surrounding areas. The level of Floridabased NPLs was 11.8% of total NPLs as of December 31, 2013. For the three months ended June 30, 2014, New Yorkand surrounding areas experienced net charge-offs of approximately $1.5 million, compared to $67 thousandin Florida. Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank's portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of June 30, 2014, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring, as impaired loans. There were
$5.9 millionof nonaccrual commercial mortgages and loans classified as impaired as of June 30, 2014, compared to $8.1 millionat December 31, 2013. There were $21.4 millionof impaired residential loans at June 30, 2014, compared to $21.3 millionat December 31, 2013. The average balances of all impaired loans were $28.0 millionduring 2014 and $26.7 millionfor the full year 2013.
During the second quarter of 2014, there were
$13 thousandof gross commercial loan charge offs and $1.8 millionof gross residential mortgage and consumer loan charge-offs as compared with $49 thousandof gross commercial loan charge-offs and $2.0 millionof residential mortgage and consumer loan charge-offs in the second quarter of 2013. Gross recoveries during the second quarter of 2014 were $2 thousandfor commercial loans and $219 thousandfor residential mortgage and consumer loans, compared to $1 thousandfor commercial loans and $165 thousandfor residential and consumer in the second quarter of 2013.
Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management's judgment, representative of the amount of probable incurred losses in the loan portfolio.
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loans losses is as follows:
As of As of June 30, 2014 December 31, 2013 (dollars in thousands) Percent of Percent of Loans to Loans to Amount Total Loans Amount Total Loans Commercial
$ 3,7776.78 % $ 3,6676.95 % Real estate - construction 541 1.14 585 1.22 Real estate mortgage - 1 to 4 family 36,090 80.57 36,678 79.92 Home equity lines of credit 6,417 11.31 6,686 11.71 Installment Loans 110 0.20 98 0.20 $ 46,935100.00 % $ 47,714100.00 % At June 30, 2014, the allowance for loan losses was $46.9 million, compared to the June 30, 2013balance of $47.6 millionand $47.7 millionat December 31, 2013. The allowance represents 1.56% of the loan portfolio as of June 30, 2014compared to 1.72% at June 30, 2013and 1.64% at December 31, 2013. The provision for loan losses was $1.5 millionfor the quarter ended June 30, 2014compared to $2.0 millionfor the second quarter of 2013. Net charge-offs for the three-month period ended June 30, 2014were $1.6 million, compared to $2.1 millionin the year earlier period. The decrease in the provision for loan losses in 2014 was primarily related to improving trends in the NPLs and charge-offs and generally better conditions in Florida, where loss severity was particularly high during the financial crisis.
In determining the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including:
· The magnitude and nature of recent loan charge offs and recoveries,
· The growth in the loan portfolio and the implication that it has in relation to
the economic climate in the Bank's market territories, and
· The economic environment in the Upstate New York territory primarily (the
Company's largest geographical market) over the last several years, as well as
in the Company's other market areas.
Management continues to monitor these factors in determining future provisions or recapture of loan losses in relation to the economic environment, loan charge-offs, recoveries and the level and trends of nonperforming loans.
Liquidity and Interest Rate Sensitivity TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Management believes that TrustCo's earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise. The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank's balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital. Using this model, the fair value of capital projections as of
June 30, 2014are referenced below. The base case scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of June 30, 2014. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
Index Estimated Percentage of Fair value of Capital to As of
June 30, 2014Fair value of Assets +400 BP 20.37 % +300 BP 21.49 +200 BP 22.51 +100 BP 23.19 Current rates 22.89 -100 BP 21.34 Noninterest Income Total noninterest income for the second quarter of 2014 was $4.5 million, compared to $5.9 millionin the prior year period. There were no net securities transactions in the second quarter of 2014, but $1.4 millionof gains were recorded in the second quarter of 2013. Excluding gains, noninterest income was up $21 thousandin the second quarter versus the prior year. For the first six months of 2014, noninterest income was down $244 thousand. Net gains on securities of $6 thousandwere included in the 2014 period, compared to $1.4 millionin the 2013 period. A gain of $1.6 millionon the sale of the Company's planned Floridaregional administrative center was also included in the first six months of 2014. Trustco Financial Servicesincome increased $118 thousandto $1.4 millionfor the second quarter of 2014 compared to the second quarter of 2013. Assets under management were $878 millionat June 30, 2014compared to $840 millionat December 31, 2013and $773 millionat June 30, 2013. The increase in assets as compared to December 31, 2013was due to market value gains and net account acquisition. For the first six months of 2014, Trustco Financial Servicesincome was $2.9 million, up $207 thousand, primarily due to higher assets under management. The total of fees for other services to customers plus other income was $3.1 millionin the second quarter of 2014, compared to $3.2 millionin the same period in 2013. The decline was due primarily to lower interchange fees and lower overdraft charges. Similarly, excluding the $1.6 milliongain on the sale of the Company's planned regional administrative building in Florida, other income was down $623 thousandto $5.7 millionin the first six months of 2014, also due to lower interchange and overdraft fee income. Noninterest Expenses Total noninterest expenses were $19.4 millionfor the three months ended June 30, 2014, compared to $21.9 millionfor the three months ended June 30, 2013. The decline was the result of a $3.2 millionswing in other real estate (income) expense, net. The change in this line was primarily the result of the noted gain of $2.4 millionon the sale of ORE property. Excluding the ORE line, noninterest expenses were up $729 thousandin the second quarter of 2014 compared to the prior year. Increases in salaries and benefits (up $365 thousand), equipment expenses (up $241 thousand) and net occupancy expenses (up $200 thousand) were the primary reasons for the increase, partly offset by a $127 thousanddecrease in professional services expenses. Other categories exhibited minor changes. Full time equivalent headcount was 747 as of June 30, 2014, compared to 710 as of June 30, 2013, which was a primary contributor to the increase in salaries and benefits. The increase in headcount was the result of new branch openings as well as increases in compliance staffing due to regulatory changes noted previously.
Occupancy expenses were up due to new branch facilities as well as increases in property taxes on both owned and leased buildings. Equipment expenses were up due to upgrades to Windows operating systems that took place earlier this year. For the first six months of 2014, total noninterest expenses were
$40.2 millioncompared to $43.4 millionfor the six months ended June 30, 2013. As with the three month period decline, the year to date decline was primarily the result of the $3.2 millionswing in other real estate (income) expense. Excluding the ORE line, noninterest expenses were down $133 thousandfor the first six months of 2014 compared to the prior year. Income Taxes In the second quarter of 2014, TrustCo recognized income tax expense of $7.2 million, compared to $5.8 millionfor the second quarter of 2013. The effective tax rates were 38.0% and 37.4% for the second quarters of 2014 and 2013, respectively. The increase in taxes and effective tax rate reflect higher pre-tax income levels. For the first six months of 2014, TrustCo recognized income tax expense of $14.3 million, compared to $11.3 millionfor the prior year period. The effective tax rates were 38.6% and 37.4% for the 2014 and 2013 periods, respectively. The increase in taxes and effective tax rate reflect higher pre-tax income levels and the impact of New York Statetax law changes which required a deferred tax asset write-down of $200 thousandduring the first quarter of 2014. Capital Resources Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios. Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures as well as a general trend towards reducing risk in the banking system by providing a greater capital margin. Total shareholders' equity at June 30, 2014was $385.0 million, compared to $348.6 millionat June 30, 2013. TrustCo declared a dividend of $0.065625per share in the second quarter of 2014. This results in a dividend payout ratio of 52.6% based on second quarter 2014 earnings per share of $0.125.
The Company and the Bank achieved the following capital ratios as of
June 30, 2014and 2013: Trustco BankAs of As of Well Adequately 6/30/2014 12/31/2013 Capitalized* Capitalized* Tier 1 leverage capital 8.21 % 8.07 % 5.00 % 4.00 % Tier 1 risk-based capital 16.57 16.34 6.00 4.00 Total risk-based capital 17.83 17.60 10.00 8.00 *Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized TrustCo Bank Corp NY As of As of 6/30/2014 12/31/2013 Tier 1 leverage capital 8.43 % 8.27 % Tier 1 risk-based capital 17.00 16.74 Total risk-based capital 18.26 18.00 In addition, at June 30, 2014, the consolidated equity to total assets ratio was 8.39%, compared to 8.00% at December 31, 2013. As a savings and loan holding company, TrustCo is not currently subject to formal capital requirements; however, under the Dodd-Frank Act, it will become subject to Federal Reserve regulations requiring minimum capital requirements in January 2015. The table above for TrustCo Bank Corp NYis a summary of actual capital amounts and ratios as of June 30, 2014and 2013 for TrustCo on a consolidated basis, with the calculations done on the same basis as for Trustco Bank. Such capital amounts and ratios are not necessarily comparable to the amounts and ratios TrustCo will report when it becomes subject to regulatory capital requirements. As discussed previously, in July 2013, federal banking agencies, including the Federal Reserve and the OCC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank.
final rules implement the "Basel III" regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.
The following chart compares the risk-based capital ratios required under existing rules to those prescribed under the new final rules:
Current Rules Final Rules Common Equity Tier 1 Capital N/ A 4.50 % Tier 1 Capital 4.00 % 6.00 % Total Risk-Based Capital 8.00 % 8.00 % Common Equity Tier 1 Capital Conservation Buffer N/ A
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules set forth certain changes for the calculation of risk-weighted assets that the Company and the Bank will be required to implement beginning
January 1, 2015.
Finally, the new rule would require the Company and the Bank to hold common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 25% to avoid limits on capital distributions and certain discretionary payments to executive officers and similar employees. Phase-in of the capital conservation buffer requirements will begin on
January 1, 2016. In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios for the Company and the Bank to be considered well-capitalized will be updated as follows: Current Rules Final Rules Common Equity Tier 1 Capital N/ A 6.50 % Tier 1 Capital 6.00 % 8.00 % Total Capital 10.00 % 10.00 % Leverage Ratio 5.00/ % 5.00 % Critical Accounting Policies: Pursuant to SECguidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company's financial condition and results, and that require management's most difficult subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company's 2013 Annual Report on Form 10-K is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
Index TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held-to-maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is unrealized appreciation (depreciation), net of tax, in the available for sale portfolio of (
$5.3 million) in 2014 and ( $3.9 million) in 2013. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other. Three months ended Three months ended June 30, 2014 June 30, 2013 Average Interest Average Average Interest Average Change in Variance Variance (dollars in thousands) Balance Rate Balance Rate Interest Balance Rate Income/ Change Change Assets Expense Securities available for sale: U. S. government sponsored enterprises $ 110,783381 1.38 % $ 218,199627 1.15 % $ (246 )(889 )
Mortgage backed securities and collateralized mortgage obligations-residential 589,334 3,299 2.24 % 545,989 2,701 1.98 % 598 225
State and political subdivisions 3,823 70 7.32 % 13,098 231 7.05 % (161 ) (220 ) 59 Corporate bonds 1,403 2 0.48 % 54,724 233 1.70 % (231 ) (133 ) (98 ) Small Business Administration-guaranteed participation securities 108,072 539 1.99 % 114,760 564 1.97 % (25 ) (60 )
Mortgage backed securities and collateralized mortgage obligations-commercial 10,871 38 1.40 11,136 38 1.36 - (4 ) 4 Other 665 4 2.41 % 660 3 1.82 % 1 0 1 Total securities available for sale 824,951 4,333 2.10 % 958,566 4,397 1.83 % (64 ) (1,081 )
Federal funds sold and other short-term Investments 606,809 376 0.25 % 529,672 327 0.25 % 49 49
Held to maturity securities: Corporate bonds 9,950 154 6.18 % 13,947 214 6.14 % (60 ) (70 )
Mortgage backed securities and collateralized mortgage obligations-residential 70,377 577 3.28 % 93,644 716 3.06 % (139 ) (427 ) 288 Total held to maturity securities 80,327 731 3.64 % 107,591 930 3.46 % (199 ) (497 )
Federal Reserve Bankand Federal Home Loan Bank stock 10,937 128 4.68 % 10,434 121 4.64 % 7 6 1 Commercial loans 221,819 2,842 5.12 % 214,158 2,812 5.25 % 30 347 (317 ) Residential mortgage loans 2,401,020 27,548 4.59 % 2,177,171 25,866 4.75 % 1,682 6,515 (4,833 ) Home equity lines of credit 339,884 3,064 3.62 % 333,510 2,806 3.37 % 258 53 205 Installment loans 5,827 167 11.47 % 4,930 162 13.16 % 5 101 (96 ) Loans, net of unearned income 2,968,550 33,621 4.53 % 2,729,769 31,646 4.64 % 1,975 7,015 (5,040 ) Total interest earning assets 4,491,574 39,189 3.49 % 4,336,032 37,421 3.45 % 1,768 5,492 (3,724 ) Allowance for loan losses (47,389 ) (48,298 ) Cash & non-interest earning assets 135,326 146,387 Total assets $ 4,579,511 $ 4,434,121Liabilities and shareholders' equity Deposits: Interest bearing checking accounts $ 632,26689 0.06 % $ 581,78582 0.06 % 7 7 - Money market accounts 655,009 618 0.38 % 650,927 630 0.39 % (12 ) 23 (35 ) Savings 1,240,158 592 0.19 % 1,218,683 829 0.27 % (237 ) 96 (333 ) Time deposits 1,144,165 2,035 0.71 % 1,119,710 1,883 0.67 % 152 41 111 Total interest bearing deposits 3,671,598 3,334 0.36 % 3,571,105 3,424 0.38 % (90 ) 167 (257 ) Short-term borrowings 189,802 342 0.72 % 179,878 367 0.82 % (25 ) 104 (129 ) Total interest bearing liabilities 3,861,400 3,676 0.38 % 3,750,983 3,791 0.41 % (115 ) 271 (386 ) Demand deposits 316,759 301,123 Other liabilities 22,325 20,590 Shareholders' equity 379,027 361,425 Total liabilities and shareholders' equity $ 4,579,511 $ 4,434,121Net interest income , tax equivalent 35,513 33,630 $ 1,8835,221 (3,338 ) Net interest spread 3.11 % 3.04 % Net interest margin (net interest income to total interest earning assets) 3.16 % 3.10 % Tax equivalent adjustment (33 ) (90 ) Net interest income 35,480 33,540 61
Index TrustCo Bank Corp NY Management's Discussion and Analysis STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods. Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held-to-maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is unrealized appreciation (depreciation), net of tax, in the available for sale portfolio of (
$7.2 million) in 2014 and ( $1.6 million) in 2013. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other. Six months ended Six months ended June 30, 2014 June 30, 2013 Average Interest Average Average Interest Average Change in Variance Variance (dollars in thousands) Balance Rate Balance Rate Interest Balance Rate Income/ Change Change Assets Expense Securities available for sale: U. S. government sponsored enterprises $ 139,907887 1.27
Mortgage backed securities and collateralized mortgage obligations-residential 567,700 6,377 2.25 % 551,667 5,470 1.98 % 907 161
State and political subdivisions 4,971 175 7.04 % 15,812 516 6.53 % (341 ) (451 ) 110 Corporate bonds 4,956 61 2.47 % 51,061 451 1.76 % (390 ) (771 ) 381 Small Business Administration-guaranteed participation securities 109,079 1,095 2.01 % 107,263 1,060 1.98 % 35 18
Mortgage backed securities and collateralized mortgage obligations-commercial 10,904 76 1.39 % 9,764 67 1.37 % 9 8 1 Other 662 8 2.42 % 660 8 2.42 % - - - Total securities available for sale 838,179 8,679 2.07
% 980,657 9,015 1.84 % (336 ) (1,880 )
Federal funds sold and other short-term Investments 591,167 727 0.25 % 468,154 572 0.25 % 155 155
Held to maturity securities: Corporate bonds 9,948 308 6.18 % 18,086 526 5.81 % (218 ) (308 )
Mortgage backed securities and collateralized mortgage obligations-residential 72,340 1,202 3.32
% 98,598 1,505 3.05 % (303 ) (627 )
Total held to maturity securities 82,288 1,510 3.67 % 116,684 2,031 3.48 % (521 ) (935 )
Federal Reserve Bankand Federal Home Loan Bank stock 10,720 261 4.87 % 10,035 240 4.78 % 21 16 5 Commercial loans 222,074 5,639 5.08 % 215,178 5,659 5.26 % (20 ) 365 (385 ) Residential mortgage loans 2,378,199 54,530 4.59 % 2,156,733 51,550 4.79 % 2,980 8,252 (5,272 ) Home equity lines of credit 340,281 6,000 3.56 % 333,472 5,606 3.39 % 394 114 280 Installment loans 5,712 334 11.78 % 4,730 320 13.65 % 14 115 (101 ) Loans, net of unearned income 2,946,266 66,503 4.52 % 2,710,113 63,135 4.67 % 3,368 8,846 (5,478 ) Total interest earning assets 4,468,620 77,680 3.48 % 4,285,643 74,993 3.51 % 2,687 6,202 (3,515 ) Allowance for loan losses (47,802 ) (48,377 ) Cash & non-interest earning assets 132,906 149,670 Total assets $ 4,553,724 $ 4,386,936Liabilities and shareholders' equity Deposits: Interest bearing checking accounts $ 619,076173 0.06 % $ 567,261162 0.06 % 11 11 - Money market accounts 650,828 1,217 0.38 % 655,027 1,315 0.40 % (98 ) (11 ) (87 ) Savings 1,232,803 1,355 0.22 % 1,211,173 1,745 0.29 % (390 ) 90 (480 ) Time deposits 1,142,001 3,986 0.70 % 1,104,379 3,703 0.68 % 283 152 131 Total interest bearing deposits 3,644,708 6,731 0.37 % 3,537,840 6,925 0.39 % (194 ) 242 (436 ) Short-term borrowings 195,954 735 0.76 % 174,001 731 0.85 % 4 172 (168 ) Total interest bearing liabilities 3,840,662 7,466 0.39 % 3,711,841 7,656 0.42 % (190 ) 414 (604 ) Demand deposits 316,386 294,449 Other liabilities 22,499 20,339 Shareholders' equity 374,177 360,307 Total liabilities and shareholders' equity $ 4,553,724 $ 4,386,936Net interest income , tax equivalent 70,214 67,337 $ 2,8775,788 (2,911 ) Net interest spread 3.09 % 3.09 % Net interest margin (net interest income to total interest earning assets) 3.15 % 3.15 % Tax equivalent adjustment (78 ) (192 ) Net interest income 70,136 67,145 62